(03) 9020 2905PORTFOLIO POINT: Here are the top eight SMSF gearing tips from super strategic guru Grant Abbott.
The onset of the Global Financial Crisis ruined a few global parties. Overzealous equity prices, securitisation, property, any company/instrument with too much debt. When reality (the fun police) was belatedly called in, a few “good things” came to an end.
But it also ruined at least one party that hadn’t yet even kicked off. Gearing inside super. And, given what happened to investment markets, this was a good thing.
In late September 2007, just five weeks before world markets peaked and began to fall, the ATO changed the rules as they related to borrowing inside super funds. The change took super professionals by complete surprise. Few, if any, saw it coming.
It took a while for the ramifications to be understood. And many professionals are still struggling with the changes. Because it snuck up, nobody was ready and organisations took forever to get product and loans out.
Even as products were made available, the credit crisis killed them off, particularly nimble players. From Lift Capital, which offered an innovative share loan facility, to Calliva, whose property loans were pulled after financiers pulled the pin. Major lenders held back completely.
Two years on, much has settled. Like the introduction of new technology, the huge prices that were being charged for the necessary infrastructure (trusts and supporting documentation) have significantly reduced. The interest rate margins that lenders were charging have considerably fallen.
Within a couple of months of the changes being announced, I remember seeing SMSF strategic guru Grant Abbott give a presentation on the topic at a bank-sponsored breakfast. This is a man who spends his days thinking of ways of use the law to its fullest. He’s incredibly passionate about it and his mind is one of those that rarely shuts off.
Half-way through the presentation on ways to make use of the new laws, he got feverishly excited by a new thought. It blurted out of his head. “Wow, pardon me, but I hadn’t even thought about that as an option before!” He excused himself to the audience for about 10 seconds while he jotted down a quick note. Then he returned to his presentation.
Two years down the track, Grant, whose business is www.smsfstrategies.com, has written up a list of his favourite SMSF gearing strategies.
Grant says that trustees and advisers are slowly becoming aware of the power of the new changes. They are “simple, flexible and more strategic than the pre-1999 unit trust arrangements ever were”, he says.
Even though the arrangements are commonly referred to as instalment warrants, Grant claims the changes (under Section 67 (4A)) bear no resemblance to instalment warrants, but are simple loans through a bare trust which is “inserted into the documentation trail for the SMSF trustee’s protection”.
Grant’s top eight tips rely on strategy and therefore ignore the packaged products that are available in the market.
Straight up bank loan to the SMSF
“Simple, but still the best,’’ says Grant. Lenders are now lending up to loan-to-valuation ratios of 80% and interest rates can be attained for less than 6%. NAB treats it almost as a straight property loan.
Use the loan through the SMSF and bare (custodian) trust to borrow to buy residential, commercial, vacation or retirement property (but be aware of the sole purpose test). Loans are now being offered for as long as 25 years, which the potential to do interest-only payment terms of up to 15 years.
Back-to-back lending
If you have existing investment properties, you could use the equity in those properties to lend to the SMSF. In most cases, this loan would be made from you as an individual to the trustee of the fund (you again).
You would need to be careful about charging a commercial rate of interest. The Tax Office will see uncommercial interest rates (particularly when no interest rate is being charged) as a potential back-door contribution or receiving a benefit from your fund.
Joint venture SMSF lending arrangements
A more complex agreement, but Grant claims two or more SMSFs could enter into a partnership borrowing arrangement through a simple or single bare/custodian trust.
Negatively gear inside the fund
A bare/custodian trust can be used to great effect inside a SMSF that has both accumulation and pension portions.
Just as it is outside of super, have the negatively geared assets in the accumulation portion of the fund. These will generate the best tax deductions for the fund, where they could offset income tax and assessable contributions tax. If the same SMSF has a pension portion – which pays no tax – then that’s where you want to have the positively geared or high-yield investments.
Asset transfer as a loan
Listed shares, managed funds and business real property could be loaned to the super fund rather than contributed. They can be transferred into a bare/custodian trust within the fund, with the underlying value of the assets being recognised as a loan.
If the loan is less than 100% of the value of the asset, then the remainder would be considered to be a contribution. That is, if you put in a $500,000 property, but made the loan $400,000, then the remaining $100,000 would be considered a contribution.
Forgiving loans as contributions
Then, if the lender is a related party (you), as each year passes, you could “forgive” a part of the loan each year to essentially make a non-concessional contribution to your SMSF.
It would take about seven years, under current contribution limits, to move a $1 million property into a super fund through gradual forgiving of the loan and does so “without messy round robin transactions” Grant says. “Use the maximum contributions caps each year or lose them.”
Help the kids with their super
“Elder members of the fund can JV inside the fund with younger member’s super equity to acquire an investment asset subject to a borrowing arrangement with the younger member increasing their equity share over time with on-going salary sacrifice or non-deductible contributions,” Grant says.
The custodian trust as a pass through mechanism
Many assets, included externally geared assets, can be slowly transferred into the fund, as the gearing on the asset outside the fund is reduced. This would work best if the assets are transferred in to the fund as it’s in pension phase.
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Separately, it’s November, so anyone who has not adjusted their salary sacrifice contributions to take into account the Rudd Government’s lowered limits should do so immediately.
Concessional contributions were cut from $50,000 to $25,000 (for the under 50s) and from $100,000 to $50,000 for the over 50s.
If you are earning, say, $150,000 you will receive a total of $13,500 in Superannuation Guarantee contributions from your employer this financial year. If you are under 50, that means you can only salary sacrifice a further $11,500. For those who were still contributing under the old limits, this is probably the month that you will run into trouble.
The same applies to members who were contributing under the $100,000 limit that has been cut to $50,000.
Don’t delay in speaking to your pay office.
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None of the recommendations in this article should be taken as personal investment or financial advice. In any investment program, your personal situation and needs should be taken into account. Please see your adviser/s before implementing any major changes to your investment program.
Bruce Brammall is the author of Debt Man Walking and director of Castellan Financial Consulting.